German borrowing costs surged by the most in 17 years on Wednesday, as investors bet on a big boost to the country’s ailing economy from a historic deal to fund investment in the military and infrastructure.
The yield on the 10-year Bund surged 0.21 percentage points to 2.69 per cent, its biggest one-day move since 2008, with markets braced for extra government borrowing.
Chancellor-in-waiting Friedrich Merz late on Tuesday agreed with the rival Social Democrats (SPD) to exempt defence spending above 1 per cent of GDP from Germany’s strict constitutional borrowing limit, set up a €500bn off-balance sheet vehicle for debt-funded infrastructure investment and loosen debt rules for states.
Here is more from the FT, noting that crowding out is still “a thing.” Of course it is wrong, or at least not obviously correct, for the article to report that “investors bet on a big boost to the country’s ailing economy…” I would sooner regard this as bad news for German consumption, naming that trying to address some of their problems will involve significant opportunity costs. Share prices did go up, and in part you can think of this as a transfer of resources from German individuals to defense and infrastructure firms. You might think additional German defense spending is necessary, as I do, but still that does not boost living standards. The additional infrastructure might, let us hope they are able to find ways to cut other spending along the way, surely it is not all super-efficient?
Janan Ganesh’s latest FT Op-Ed is titled “Europe must trim its welfare state to build a warfare state,” let us hope they can make that work. So far I am waiting to see the evidence.
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